At Work; Endangered: Retiree Health Benefits

By BARBARA PRESLEY NOBLE

Published: February 9, 1992

IT would be perfectly understandable if Harold S. Share expressed some bitterness about nearly being done out of his retirement health benefits by the bankruptcy of the Federated-Allied department stores. "There is no shortage of villains," said Mr. Share, a former vice president at an Allied Stern's store in Paramus, N.J., but he said his place of employment was not among them.

"It was the excess of the 80's manifesting itself. It was Campeau and the people who provided him money," Mr. Share said, a bit of heat creeping into his voice when he referred to Robert Campeau, the quintessential financial buccaneer of the 1980's who at one point owned Federated and Allied. "It was not the management of the stores."

The saga of Federated Department Stores and the Allied Stores Corporation -- at $8.2 billion, it was and remains one of the most expensive nonbanking bankruptcies ever -- has wound its way to an apparently happy denouement. Mr. Campeau is long since out of the picture and last Wednesday, the stores, which include Bloomingdale's, Bon Marche and Jordan Marsh, emerged with a reorganization plan.

A small piece of that plan pertains to Mr. Share, who as the unpaid head of the Official Retirees Committee represented some 6,400 nonunionized employees, from clerks to senior executives, who retired before Federated-Allied entered Chapter 11 in January 1990. After 13 months of negotiating, Mr. Share and his committee reached a compromise with the department stores that preserved a semblance of the retirees' health benefits.

The Federated-Allied dispute emerged from one of the iron laws of business: companies, especially companies in mortal peril, will trim costs where they can. As times and hardball tactics grow harder, benefits of all types for all employees, past and present, have become fair game. A General Accounting Office study last year of 40 troubled companies found that nearly half ended benefits for some 91,000 employees. Nine million retirees are enrolled in health plans that could be terminated.

In the Federated-Allied bankruptcy, the company insisted it had the right to modify or end the health benefits offered to retirees -- as it did with current employees and post-bankruptcy retirees. "The pre-bankruptcy retirees argued they should be insulated from the changing costs of health care," said Glen D. Nager, a partner at Jones, Day, Reavis & Pogue in Washington, which represented Federated-Allied.

The retirees argued that modifications could turn into de facto terminations because of rising costs or reduced benefits.

The two parties stayed at the bargaining table, through thickening and thinning patience, as mandated by Judge J. Vincent Aug Jr. of the Federal Bankruptcy Court in Cincinnati, where Federated is based. According to both sides in the negotiations, the retirees' settlement represented persistence and ingenuity, in court and at the table.

In October, Judge Aug ruled against the retirees' argument that their benefits were vested for life, a decision that may clarify a provision of the bankruptcy code designed to protect retiree benefits.

But pivotal action took place around the table where, the sides agree, there were two crucial moments. One occurred when the retirees suggested that rather than continue haggling over restricting changes in the dozens of plans offered, the company make a "defined contribution" to a trust fund that would be administered independently.

The second came after a period of wrangling over how the fund would be administered, when the company accepted a proposal to establish a VEBA, or voluntary employee benefits association, a trust that provides tax benefits and a degree of insulation for the retirees from the potential vagaries of Federated-Allied's future.

In the settlement approved by Judge Aug 10 days ago, Federated agreed to make quarterly payments totaling $80 million over 50 years into the VEBA. The pact takes inflation and rising health care costs into account.

Mr. Nager of Jones, Day thinks the retirees did very well for themselves, at his client's expense. Their desire to protect themselves was reasonable, he says, but so was Federated-Allied's attempt to be responsible to creditors. "Sometimes solutions have to come from other sources than the company in Chapter 11," he said.

Mr. Share says the retirees will get about 42 percent less in benefits than they did before the bankruptcy -- but about 50 percent more than the the post-petition retirees get now. The best part, he says, is that "we are in control of our own destiny." A SOMETIMES CHILLING END TO BENEFITS

During its epic bankruptcy in 1986, the LTV Corporation created a pension and benefit milestone by declining to put retirees before other creditors. Since then, despite protective legislation -- passed and in progress -- retiree benefits are not the sure thing they once were. David Certner, a pension specialist at the American Association of Retired Persons, says retirees in general are being asked to assume more of the cost of health care. "A bankruptcy speeds up the process of pushing costs back on the retirees," he said.

The scope and suddeness of a turn in retiree fortunes can be breathtaking. When Pan American World Airways went bankrupt in December after a deal with Delta Air Lines collapsed, more than 20,000 retirees and their dependents were suddenly left without health benefits.

"The retirees' committee is scrambling to find the money for those who aren't insurable," said Kevin Burke, a lawyer at Cahill Gordon & Reindel who is working on the Pan Am and Federated bankruptcies. "We're not even sure how many there are yet."

Photo: Harold Share helped salvage a health-benefits plan for retirees at the bankrupt Federated-Allied stores. (Frank C. Dougherty for The New York Times)